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Beijing, April 12, 2011 – Overall effective rents of Grade A office surpassed their pre-2008 financial crisis peak. Meanwhile the retail market remains active with the entrance of new brands.
Office – Five Grade A buildings enter the market; the reign of the landlords continues
Five Grade A buildings, Tongfang Tower D, Microsoft Beijing Headquarters, Jiaming Centre, Beijing International Financial Centre West Tower and Anbang Insurance Tower, were completed in 1Q11. Two of the five buildings, Microsoft Beijing Headquarters and Anbang Insurance Tower, will be for self-use, while the other three building will enter the leasing market. The five Grade A buildings totalled 409,946 sqm and increased total Grade A stock to 5.8 million sqm.
Foreign firms represented the majority of leasing demand in 1Q11, with several firms renewing leases and expanding their operations. Overall leasing demand reached 228,473 sqm, while self-use demand hit 215,744 sqm. The most active leasing submarket continued to be the CBD, which accounted for nearly three quarters of all leasing net absorption. The only other submarkets that realized large amounts of net take-up were the 3rd Embassy and Olympic Areas, each accounting for approximately 10% of leasing demand.
As leasing and self-use demand remains strong, vacancy rates continue to decrease. The overall vacancy rate fell to 10.9%, dropping 1.5 percentage points q-o-q, despite five new buildings entering the market. The CBD continued to experience the largest vacancy rate improvement, falling 6.6 percentage points to 19.3%. Zhongguancun and 3rd Embassy both experienced vacancy rate increases, due to new supply entering those submarkets; Zhongguancun’s and 3rd Embassy’s vacancy rates rose 7.5 and 5.1 percentage points, respectively. Finance Street, East 2nd Ring Road and East Chang’an each realized vacancy decreases of approximately one percentage point.
With vacant space quickly diminishing and demand continuing to be robust, rents have been rising rapidly. This quarter, overall average effective rents have surpassed their pre-2008 financial crisis peak, growing 5.1% q-o-q to RMB 218 per sqm per month (GFA). Of the major submarkets, the CBD continued to have the fastest rental growth, increasing 6.8% q-o-q to RMB 226 per sqm per month (GFA). All the submarkets achieved rental growth; however, Zhongguancun and 3rd Embassy experienced the slowest rental growth due to new supply in the two areas - Zhongguancun’s and 3rd Embassy’s rents grew 0.9% and 2.0%, respectively. According to Julien Zhang, Managing Director of Jones Lang LaSalle Beijing, “With rents rapidly rising in the office market, we expect more investment activity from foreign institutional investors and domestic insurance companies.”
Over half a million sqm of new supply are still expected to enter the market in 2011 with nearly half to be for self-use. Although more buildings will enter the market, demand is expected to continue to outstrip supply and cause effective rents to approach levels last seen in 2000.
Retail – Strong demand from retailers both looking to expand and establish a presence in Beijing
China World Mall (Phase III) was officially launched in the first quarter of 2011, adding an additional 57,000 sqm to total retail property stock. Despite continued strong retailer demand, shopping mall vacancy decreased at a relatively slow pace in 1Q11 as some shopping malls were busy adjusting their tenant mix or undergoing refurbishment to improve their appearance or shopping experience. On the demand and absorption side, positive retailer sentiment continued in 1Q11 with a wide-range of luxury and fashion brands actively expanding in Beijing. Badgley Mischka, Oriental Place, Chinese Arts and Crafts, Minimum, ZUGZUG and De Soul each opened in China World Mall (Phase III); Lanvin high-end fashion boutique and Versace were unveiled in The Village (North); Max Mara and Guess are soon planning to open in Seasons Place and One Mall, respectively, while GAP, UNIQLO, H&M and other fast fashion brands continue to seek new locations for expansion. With China’s appetite for luxury goods growing, other retailers including luxury watch & jewellery are also accelerating their pace of new store openings . Upcoming new stores include CK watch & jewellery in Xidan Joy City, Rolex in China World Mall (Phase III), HR watch in One Mall and an IWC flagship store in Parkview Green.
Many reputable retailers continue to enter the Beijing retail market. Wellendorff, a German jewellery brand, will open its first store in Beijing in China World Mall (Phase III); Manhattan Portage launched its first store in China in Xidan Joy City wth two other stores in Oriental Plaza and The Village opening soon; China’s first Hello Kitty theme restaurant will open in Gongsan Plaza; Erdos opened its first flagship store in Beijing in Chongwenmen New World Department Store; Dr.comfort held a grand opening in Seasons Place; and Swedish outdoor brand Klattermusen is planning to soon enter the market.
Supermarket, cinema and restaurant tenants also remain optimistic. OLE opened a new store in China World Mall (Phase III); Wumart lifestyle supermarket opened in Fullink Plaza; BHG opened in SOGO in Xuanwumen; and Yonghui supermarket will soon open in Henderson Center. New cinemas include Jinyi Poly and Wanda, while F&B operators Ajisen Ramen, Starbucks, Golden Banana and others are opening more outlets in the near future.
As a result of this demand, average net effective rents grew by 2.4% q-o-q in 1Q11, reaching RMB 639 per sqm per month. Due to the upgrading of several shopping malls, the market average vacancy rate decreased by a slight 0.8 percentage points q-o-q to 13.1%. Jones Lang LaSalle predicts that demand for retail space will maintain its momentum throughout 2011. Several projects in the pipeline for 2011 include Wangfu International Shopping Centre, Guoson, Le Mall and Parkview Green, which will collectively add about 600,000 sqm of new supply to the market. Driven by strong demand, rental prices will continue to increase throughout the year.
Residential – Supply of serviced apartments declined, while demand remained stable; in the sales market, transaction volumes of luxury apartments dropped as prices rebounded
No new supply of serviced apartments entered the market; this was the fourth consecutive quarter without new serviced apartment supply. Overall demand remained stable as some companies slowed their expatriate deployments. However, demand in the CBD, Lufthansa and Sanlitun areas remained strong, and pushed up the overall serviced apartment occupancy rate by 1.1 percentage points to an unprecedented 88%. Propelling demand in these areas was the significant increase in the number of foreign employees from MNC manufacturing and pharmaceutical companies leasing serviced apartments. The planned renovations of East Gate Plaza and Ascott projects decreased the total supply in the market and helped push rents to RMB 170 per sqm per month, a q-o-q growth of 0.7%. The improved performance of the serviced apartment market has attracted the attention of developers, and some luxury apartment projects in the for-sale market are expected to transform one or two buildings into serviced apartments for long-term holding. The Head of Residential Services, Zhang Hong at Jones Lang LaSalle Beijing indicated that “the serviced apartment leasing market will be more active in 2Q11, which will cause rents to steadily increase.”
Housing purchase restrictions issued in February, along with the Chinese New Year holiday, had a negative impact on luxury residential transaction volumes in 1Q11. In addition, no new projects with transaction prices above RMB 40,000 per sqm were launched in 1Q11. The transacted area of luxury apartments decreased, dropping 15.8% q-o-q and 33.6% y-o-y and the average transaction price of luxury apartments grew slightly, increasing 3.2% q-o-q and 12.3% y-o-y to RMB 42,328 per sqm. Projects with an average price between RMB 30,000 and RMB 40,000 per sqm accounted for 66% of all the luxury residential transaction volumes. Most luxury homebuyers were Beijing families, those who were not affected by the home purchasing restrictions.
Three luxury villa projects, China Overseas No.9 Mansion in Fengtai District, as well as, Yutangshan and Jinkewangfu in Changping District, were launched in this quarter. The transaction area of luxury villas increased 10.8% q-o-q and 24.0% y-o-y; however, the average luxury villa price decreased 7.8% q-o-q to 42,366 per sqm, due to newly launched projects located in new developing villa regions, such as Changping District, Fengtai District and Tongzhou district. Luxury villas in these areas have transaction prices below the market average.
Jones Lang LaSalle expects the current purchasing restrictions and tightening measures to persist in 2011. Therefore, we anticipate a further drop in luxury apartment transaction volumes, as well as a slightly decrease in average prices, as market sentiment is impacted. The new supply of luxury villas is expected to be limited, the average price will be relative stable compared with that of luxury apartments.
Industrial – Persistent demand for space drives vacancy to below 3.0% and rents further upward
Followed by a year where record absorption of space drove vacancy rates to a new low, fundamental demand for logistics space remained high in 1Q11. However, the cyclical effect of the Chinese New Year holiday and overall scarcity of space available for lease in the market resulted in a decline in quarterly net absorption. Persistent demand for logistics space drove market vacancy down by an additional 2.3% percentage points q-o-q to an average of 2.8%. Although the market was less active from a leasing standpoint, sectors such as automobile, retail and e-commerce, and manufacturing still served as the primary drivers of demand. In 1Q11, no new logistics projects were completed. The previous quarter’s sole new project, Boustead, located in Tongzhou Logistics Park, successfully leased about half of its space and will see more tenants move into the project within the next quarter.
Logistics space rents continued to increase in 1Q11, at a rate of approximately 2.5% q-o-q while reaching an average of RMB 0.90 per sqm per day. After growth of more than 5.0% during the previous two quarters, rental growth dipped slightly during 1Q11 as more projects in the market registered full occupancy and therefore, did not record transactions at higher rents During 1Q11, one noteworthy en-bloc transaction was recorded in the logistics market when Goodman purchased the Kangli Logistics facility in Beijing Airport Logistics Park, which comprises the 10,654 sqm warehouse and two adjacent vacant land plots where an additional 30,000 sqm of logistics or warehouse space can be constructed. Looking forward through the remainder of 2011, it is expected that five new projects will reach completion with the possibility of several more also being completed before year’s end. A strong indication of pent-up demand in the market and rapid expansion of the overall economy and its growing need for logistics services and warehouse space has been the pre-leasing of large areas within future projects. Expected high absorption rates of new supply in the market during the year will support continued rental growth in the logistics sector.
Investment – Commercial property is the hotspot of the en bloc investment market
State Owned Enterprises (SOEs) have taken advantage of their strong balance sheets to successfully acquire prime office projects, especially projects located in mature business areas. SOEs have been purchasing landmark buildings in prime locations for their new headquarters; a notable transaction includes Minmetals Group purchasing the office complex Fifth Square for RMB 4.5 billion. Foreign firms have been active in the office market as well. For example, a Hong Kong based company purchased T3 tower of Xihuan Plaza from an American fund, which had held the property for several years.
With regards to prime shopping centers and department stores, there is a limited amount of available projects that generate high revenues in the market; however, institutional investors with solid financial and operational backgrounds are taking an optimistic view of potential investment opportunities in this field. Helping to support institutional investors’ optimism was the deal closed by CapitaLand Retail Fund, which acquired the retail podium, Guancheng Plaza, which has a total GFA of more than 90,000 sqm and is located in Chaoyang district. Additionally, on 4 January 2011, Finance Street Holdings reported that it will invest a total of RMB 4 billion in B, C and D plots of CITIC Town located in Xuanwu district. The project has a total GFA of more than 200,000 sqm, including a shopping center, a Grade A office, a hotel and serviced apartments. “Domestic investors are still the dominant factor in demand, however we see increasing activity driven by regionally based institutions (i.e. Singapore & Hong Kong); the strong resurgence in the office leasing side and the retail sentiment are the driving factors pushing capital values up while further compressing investment yield” indicated Eric Pang, investment director of Beijing Jones Lang LaSalle.
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